Why Raising the Minimum Wage is a Good Idea

Basic microeconomic models of supply and demand hold that price floors are fundamentally distorting to efficient markets. Artificially raising the price of a good above the market-clearing, equilibrium price creates an excess of supply to demand and deadweight loss to the overall economy. Applying this logic to the labor market would seem to indicate that a high minimum wage is a recipe for unemployment, as it would lead to greater supply (workers willing to work) than demand (open positions companies are looking to fill). This analysis, however, fails because the labor market is fundamentally different. The inefficiencies and friction of the labor market, as well as the societal benefits of higher wages, makes raising the minimum wage a sound economic policy.By Victor Zhao, 4/5/14

Basic microeconomic models of supply and demand hold that price floors are fundamentally distorting to efficient markets. Artificially raising the price of a good above the market-clearing, equilibrium price creates an excess of supply to demand and deadweight loss to the overall economy. Applying this logic to the labor market would seem to indicate that a high minimum wage is a recipe for unemployment, as it would lead to greater supply (workers willing to work) than demand (open positions companies are looking to fill). This analysis, however, fails because the labor market is fundamentally different. The inefficiencies and friction of the labor market, as well as the societal benefits of higher wages, makes raising the minimum wage a sound economic policy. Labor is unlike most other goods because of its basis on contracts and human relationships. These unique characteristics mean that there is more friction in the labor market than in other markets — more inertia and a tendency to resist change. While raising the minimum wage abnormally high would undoubtedly cause massive disruptions to the labor market, a minor increase in the minimum wage is likely to have little to no effect at all. Labor is not another input that could be added or subtracted at will; in some managerial accounting methods, in fact, labor is treated as a fixed cost. Moreover, it is not always possible to replace an employee's skillsets or demand more production out of other employees. The difficulties and barriers to firing someone, therefore, mean that the primary effect of a slight increase in the minimum wage is not increased unemployment but higher income for low-wage Americans. President Obama and congressional Democrats' call for a higher minimum wage, therefore, is both justified and sound. The abundance of minimum wage hike measures being raised and debated at the state level is evidence of that fact. States are often looked to as "laboratories of democracy" where ideas can be tested and tried before being adopted nationwide. Raising the minimum wage, in fact, has broad support amongst a large majority of Americans in polling done nationwide. A Quinnipiac poll found, for example, that 72% of Americans nationwide support an increase in the minimum wage, including a majority of Republicans. The movement of cities and localities to raise the minimum wage in their geographic jurisdiction is an indication that there is a real demand for such an increase across the nation. Unfortunately, congressional Republicans have blocked a minimum wage increase in Congress as an unnecessary intrusion into the markets. They argue that doing so would put undue pressures on businesses to raise wages, particularly affecting small businesses who may not be able to absorb the higher labor costs. This could have an impact on not only profitability but employment if businesses are forced to lay off workers as a result of this policy. Furthermore, they assert that beneficiaries of a minimum wage increase may not be those at the bottom of the income ladder, as many below the poverty line are there precisely because they do not have jobs. Studies performed on the effect of a minimum wage increase, however, have shown these concerns to be overblown. Most notably, a study by David Card and Alan B. Krueger in 1995 examined the effect of a minimum wage increase in select states and found that it to have minimal measurable impact on employment. Given that minimum wage earners are more likely to spend additional income, and spending boosts the economy through the multiplier effect, it could even be the case that the additional economic activity results in more growth and employment. Faced with Republican intransigence, the president has been forced to act unilaterally in issuing an executive order to raise the wage for government workers. That, however, is only a partial solution. Real reform would have to originate from Congress, where the legislation has stalled. In fact, given the inability of Congress to move beyond its current gridlock and pass even small measures, this seems unlikely to be the case. An increase in the minimum wage seems destined to be yet another item on the president's agenda that fails to make it through a polarized and obstructionist Congress. Nevertheless, continuing to push for an increased minimum wage could potentially benefit Democrats. The overwhelming support for a minimum wage hike across the country means that Democrats are positioned on the right side of the issue. Moreover, in a year of midterm elections, which historically have garnered less voter interest and been bad for incumbent parties, the minimum wage issue could serve to galvanize supporters and increase voter turnout, thus helping Democrats across the board. Finally, pressing on the minimum wage issue allows Democrats to continue framing the Republican Party as the party of the rich and elite who are out of touch with struggling Americans. The last point, in fact, is particularly important. President Obama won reelection in part by casting Mitt Romney as an elitist, using his infamous "forty-seven percent" remark to great avail. If Democrats can use the minimum wage issue to again effectively portray Republicans as the party of the rich who are unwilling to address growing economic inequality, then perhaps they have a chance at retaining some seats in what looks like an increasingly difficult year electorally. In the process, they will be advocating for concrete change with real economic benefits for millions of low-wage workers nationwide.